"We are perfectly willing to spend $4 on coffee (for some of us this is a daily purchase), or $500 on devices that you can argue we don’t really need. However, when it comes to buying digital items, such as apps, most of which are priced at $1, we suddenly get really cheap. Why? .....why is the price anchor for apps so low? I think the answer to this is that we have been trained with the expectation that apps should be free."

A few days ago I posted on the NY Mets' Financial difficulties. Now the Mets' difficulties are dragging down the rating of the bonds that were used to finance Citi Field as well. The bonds, which are in theory separate from the Mets, were given a negative outlook and a BB+ rating by S&P based on the fact that the Bonds are heavily dependent on individual game ticket sales and these are highly dependent on the team's winning, which seems to be unlikely this year.

“The key issue looking forward is that any unfavorable change in team financial operations may hurt team performance and reduce turnstile volumes and revenue,” S&P said....Season tickets, which make up about 40 percent of Citi Field’s total revenue, declined 22 percent, S&P said. Merchandise and food and beverage receipts, which make up 1 percent and 7 percent of revenue, respectively, fell 20 percent, the rating company said....

"A $20,000 block of Mets stadium bonds backed by payments in lieu of taxes with a 5 percent coupon and maturing in 2046 traded yesterday at 83.3 cents on the dollar to yield 6.2 percent."

Wednesday, December 28, 2011

Ok, so this is probably economics, but it was so interesting I could not pass up sharing it. And be careful to jumping to conclusions. He points out that the one area where he believes it works is in pharmaceuticals. His conclusions? Create patents of differing times periods (some 3 years, some 20 years, etc).

"Alex Tabarrok argues that innovation in the United States is being held back by patent law, the legal system, and immigration policies. He then suggests how these might be improved to create a better climate for innovation that would lead to higher productivity and a higher standard of living."

"The argument for patents is that imitation is a lot cheaper than innovation. So that, if a firm innovates, creates something new, and another firm can come along, imitate that product, eat away all the profit, and the first firm can't recover its research and development costs. And then they wouldn't have any incentive to do them and you won't get much innovation in the first place. Exactly right. Now, there's lots of arguments against. One of the first arguments against is just to ask: Are patents necessary?.....in 1930, we created in the Plant Patent Act, we could patent roses. So, did patenting of roses lead to more roses, more beautiful roses? Because people could capture the benefits without fear of being copied? Exactly. Did it lead to a flowering? No, it did not. We didn't see any big increase in rose innovation. In fact, we might have seen a little bit of a decrease. Moreover, even today, most new roses are not patented. Most inventions, most innovations are not patented. And I think people are a little bit surprised about this. With a few exceptions--chemicals, pharmaceuticals--being really the two biggest important exceptions. In some fields we don't even all patents, like fashion. Highly innovative, no patents at all. But in most fields, most innovations are not patented at all. You mention an example I've been thinking about recently, which is sports. Somebody innovates a new formation in football. It can't be patented. But coaches spend hours looking for a small edge."

While a rational person would not need to impose constraints on ourselves, many of us need to. In Behavioral finance we often talk about the seeming irrationality of them but all acknowledge both using them and them working. In his TED talk, Dan Goldstein goes further into this topic and explains why we impose constraints on ourselves (100 calorie packs, Stickk.com, even budgets), how framing matters, and even how the discount rates we use affects our decision making.

"During the experiment bees were given their own investment choice to make: Either feed from blue flowers which always contained 2ml of nectar without fail, or gorge on yellow flowers, which were randomly mixed so that one in three contained a triple payoff with 6ml nectar.

The experiment showed that bees initially "invested" evenly in both colors. But they quickly learned to stick to blue flowers, which always contained 2ml of nectar. In fact, they preferred the reliable blue flowers over the yellow flowers 84 per cent of the time."

Oh my...my Mets are not looking good (Remember: debt makes good times great, and bad times horrible.)

"... the Mets worry Major League Baseball enough to be seen as a troubled franchise on a short tether. Their $430 million loan on the team is due in 2014. Their $25 million loan from M.L.B. is past due and repayment has been extended. They recently borrowed $40 million from Bank of America.

Their valuable network, SNY, is also heavily leveraged, to the tune of $450 million, a loan that must be repaid in 2015. And the Mets’ Citi Field bond payments leapt from $19 million last year to $43.7 million.

That is a lot of borrowing for a team that lost $70 million last season and had faltering attendance."

Sunday, December 25, 2011

Duke' Fuqua School of Business just posted this fascinating talk by Antony Bugg-Levine (author of Impact Investing) on what Impact Investing is and what he sees in the field.
It's sort of long, but very interesting talk on Impact Investing!

What is impact investing? I would define it as sort of the marriage between traditional finance and social entrepreneurship that concludes profit based organizations can and do much good.

(Oh and he is right, it sounds better to say "I am a social entrepreneur" than than "I run a charity").

"Impact investing refers to investments made based on the practice of assessing not only the financial return on investment, but also the social and environmental impacts of the investment that happen in the course of the operations of the business and the consumption of the product or service which the business creates. An impact investor seeks to enhance social structure or environmental health as well as achieve financial returns."

Friday, December 23, 2011

"This has not exactly been a time of great love for bankers. From the continuing foreclosure crisis to Occupy Wall Street’s campaign against “the 1 percent,” it is easy to forget that not all banks are complicated giants, trading in derivatives and re-hypothecating valueless collateral. The Bank of Cattaraugus, for example, is by asset size the state’s smallest bank (one branch, eight employees, no credit default swaps) and yet it plays an outsize role in this hilly village an hour south of Buffalo: housing its deposits, lending to its neediest inhabitants and recently forbearing on a mortgage when the borrower, a bus mechanic, temporarily lost his job after shooting off his finger while holstering his gun.

If it sounds old-fashioned, it is: It’s not the kind of bank you’ll find anymore in New York City, where multiple branches and capitalizations counted in 10 figures are the norm. With $12 million in total assets, the Bank of Cattaraugus is a microbank, well below the $10 billion threshold that defines small banks. It exists in a seemingly different universe from the mammoth money-center banks-turned-financial-services-conglomerates, like Citigroup ($1.9 trillion in assets) or JPMorgan Chase ($2.25 trillion).

With obvious exceptions, business at the Bank of Cattaraugus hasn’t changed much since 1882, when 20 prominent residents — among them a Civil War surgeon and a cousin of Davy Crockett — established the bank to safeguard townsfolk’s money and to finance local commerce.

In its 120-year history, the bank has rarely booked a profit for itself in excess of $50,000 (last year, Mr. Cullen said, it made $5,000.) He and his officers are industry anomalies: bankers who avoid high-risk and high-growth tactics in order to reinvest the bulk of their earnings in their community’s economy."

This bank is run by the Cullens, a family who has sent many through SBU and I had two of them as students (Tom and Tim). Great people! (also active in BonaResponds!)

“It makes no sense that it takes 75 days — used to be 150 days — to register a business in Haiti,” Jean-Louis said, speaking at the Haiti Reconstruction Forum 2011 sponsored by the Inter-American Development Bank (IDB) and Enterprise Florida. “The Martelly-Conille government wants to take action. We are taking action to improve business environment in Haiti.”

Later, Jean-Louis told The Miami Herald that he feels “there is a momentum” happening in Haiti, “now it’s up to us to make sure laws are being passed.”

Wednesday, December 21, 2011

" The neuroeconomic revolution has passed some key milestones recently, notably the publication last year of the neuroscientist Paul Glimcher's book Foundations of Neuroeconomic Analysis - a pointed variation on the title of Paul Samuelson's 1947 classic, Foundations of Economic Analysis, which helped to launch an earlier revolution in economic theory. And Mr Glimcher himself now holds an appointment at New York University's economics department.

To most economists, however, Mr Glimcher might as well have come from outer space. After all, his doctorate is from the University of Pennsylvania school of medicine's neuroscience department."

I finally got around to watching his presentation at the Nobel Conference from back in October. HIGHLY HIGHLY recommended. It is STAGGERINGLY good!

" working on a more accurate pricing model that incorporates The financial crisis and the meltdown in Europe have exposed the deficiencies of traditional asset- pricing models, particularly their inability to account for the effect of contagion from one market to another. The good news is that the length and the persistence of the turmoil have given researchers a trove of data to develop new predictive tools.

In our work, we developed an asset-pricing model to study these market disruptions, which incorporates random shocks to volatility that are correlated across markets"

"Crucially, our model expresses all three ways in which market shocks tend to cluster during times of crisis: time-series clustering, whereby large shocks today predict further large shocks tomorrow; cross-sectional clustering, whereby large shocks in one region pre- dict large shocks in other regions; and directional clustering, whereby shocks to aggregate volatility are associated with specific directional biases in contemporaneous country-level returns."

and later:

"We have three main findings. First, we present evidence that European equity markets exhibited significant excess correlation during the debt crisis of 2010, relative to an asset- pricing model that assumes regional market integration.....[Secondly] we find that part of this excess correlation can be attributed to the impact of mutually exciting volatility shocks in the cross-section of expected returns. We propose global and regional volatility-risk factors to quantify this impact, and show how to con- struct these volatility risk factors directly from the time series of market returns....Our third main finding concerns the contemporaneous relationship between volatility and expected returns. We are primarily interested in the role of volatility shocks in under- standing contagion, rather than in estimating volatility per se. Nonetheless, in performing a formal statistical assessment of our volatility model, we find a significant negative rela- tionship between daily volatility and expected returns on the U.S. market portfolio."

Well this one is timely. We ended class this past week saying that what we know and what we don't know about finance. One of the things I said we don't know is the benefits of diversification within a world where correlations increase dramatically in times of market turmoil. The authors do a wonderful job of looking at this "unknown" in a paper that is guaranteed to be coming to a top ranked journal soon.

"When Senate Democrats finally brokered a compromise over the proposed health-care law, a group of hedge funds were let in on the deal, learning details hours before a public announcement on Dec. 8, 2009.

The news was potentially worth millions of dollars to the investors, though none would publicly divulge how they used the information. They belong to a select group who pay for early, firsthand reports on Capitol Hill."

"For the first time since 1949, the United States is poised to become a net exporter of petroleum, according to the Petroleum Supply Monthly report for November put out by the U.S. Energy Information Administration.

Through the first nine months of 2011, the U.S. exported 753.4 million barrels of gasoline, diesel and other oil-based fuels while only importing 689.4 million barrels."

"Although criminal sanctions represent a much greater penalty than civil sanctions, the higher burden of proof required makes their enforceability weaker. This trade-off between severity and enforceability implies that the impact of criminal sanctions is ambiguous. In this paper, we empirically examine this issue by studying the deterrence of insider trading following the introduction of criminal sanctions in a developed market. Significant changes in sanction regimes are rare, especially when criminal sanctions are introduced without other changes. In February 2008, New Zealand introduced criminal sanctions for insider trading. This change of law offers a unique setting to examine the deterrence effect of criminalization. Using measures for the cost of trading, degree of information asymmetry, and probability of informed trading, we find that the enactment of this law led to a worsening in these measures. These findings suggest that the weaker enforceability of criminalization outweighs the associated increased severity of the penalties. Consequently, we would suggest that criminal sanctions in New Zealand and in other markets where they have been applied should be reconsidered."

Monday, December 19, 2011

" The six children of Walmart's founders, Sam and James "Bud" Walton, had the same net worth in 2007 as the entire bottom 30 percent of American earners, according to an analysis from Sylvia Allegretto, a labor economist at University of California-Berkeley's Center on Wage and Employment Dynamics.

Though the 2007 figure is striking, the gap between the Walmart heirs and the rest of the country may get even bigger -- the Walton's combined fortune has grown by more than $20 billion, according to data compiled from the Forbes 400 this year."

An MBA student sent me this last week and I never had time to post it (and was not sure if I believed it), but seeming looks legit.

Sunday, December 18, 2011

"The Securities & Exchange Commission, however, says Rudy Ruettiger has grown up to become a penny stock promoter and scammer. The former Notre Dame walk-on has agreed to pay $382,866 to resolve the SEC’s claim that he participated in a pump-and-dump, fraudulently inducing investors to bid up the stock of his sports drink"

Friday, December 16, 2011

Taxpayers will lose $14B on auto bailouts – USATODAY.comI confess I have not run any numbers on this, but come on, losing $14B (and maybe more as the article was ambigous on whether this included the "$19.4 billion the government put into GM before the 2009 bankruptcy" or not) can hardly be an unambiguous success. Can it?

"Taxpayers will lose about $14 billion on the $82 billion investment to restructure General Motors, Chrysler and Ally Financial, former auto czar Steven Rattner said Thursday."

He continues:

""It's unambiguous that it was a success," Rattner told the Detroit Economic Club, acknowledging his inherent bias because he led the effort."

Wednesday, December 14, 2011

"Recently, American Airlines filed for bankruptcy, it did so deliberately. The airline had four billion dollars in the bank and could have kept paying its bills. But it has been losing money for a while, and its board decided that it was foolish to keep throwing good money after bad. Declaring bankruptcy will trim American’s debt load and allow it to break its union contracts, so that it can slim down and cut costs.

American wasn’t stigmatized for the move. Instead, analysts hailed it as “very smart.""

What are your thoughts? Good move? What will be impact on future borrowing? Relations with others stakeholders?

Tuesday, December 13, 2011

"For a long time the perception was that the creation of the euro meant sovereign risk was effectively the same across all countries. That of course proved to be wrong. The Lehman's crisis and financial meltdown that followed affected the deficits and debt levels of different countries in different ways. Interestingly it is much the same countries now with very high yields as it was pre-euro, suggesting little has changed fundamentally in a decade." VICKY PRYCE, SENIOR MANAGING DIRECTOR FTI CONSULTING

"The loan marks the second time in a year that the Mets have received an infusion of cash. A year ago, the team’s owners, Fred Wilpon and Saul Katz, received a $25 million loan from Major League Baseball, but they have not been able to repay it. Meanwhile, Sandy Alderson, the club’s general manager, said last week that the organization had lost $70 million in 2011 alone."

Friday, December 09, 2011

"In his new e-book, How to Be a Rogue Trader, Financial Times columnist John Gapper explains why this story has become so familiar over the years. As he puts it, the rogue trader is a species of sorts within the world of finance, a special breed with certain behaviors and characteristics that are consistent through time. Gapper delves into evolutionary biology and the research of Daniel Kahneman to better understand the nature of men like Nick Leeson, Joe Jett, and Jerome Kerviel.

Q. You start with a discussion of evolutionary biology to examine the motivations of a rogue trader. Explain that.A. I found the research fascinating, these evolutionary studies of the ways that species adjust their behavior when foraging for food. When they’re comfortable, they behave with risk aversion — they’ll go to the place that is the most reliable, even if it doesn’t offer the best returns. But when their survival is threatened, they will go to the riskiest places.Q. You also spend a bit of time discussing the work of Daniel Kahneman. ....A. The Kahneman work is classic in the way that it explains how we react to gain and loss. It did strike me, the degree to which the behavior of traders falls in line with his work. They are hungry in a very basic sense. Kahneman talks about how moving the reference point changes people’s attitude to risk. If you look at a trading floor in those terms, you’re setting up an incentive system so that traders are eager to take risks."

"Q: Fine. How is Credit VaR typically calculated?A: Credit VaR is calculated through a simulation of the basic financial variables underlying the portfolio under the historical probability mea- sure, commonly referred as P, up to the risk horizon. The simulation also includes the default of the counterparties. At the risk horizon, the portfolio is priced in every simulated scenario of the basic financial variables, including defaults, obtaining a number of scenarios for the portfolio value at the risk horizon.

Q: So if the risk horizon is one year, we obtain a number of scenarios for what will be the value of the portfolio in one year, based on the eve- olution of the underlying market variables and on the possible default of the counterparties.A: Precisely. A distribution of the losses of the portfolio is built based on these scenarios of portfolio values. When we say ”priced” we mean to say that the discounted future cash flows of the portfolio after the risk horizon are averaged conditional on each scenario at the risk horizon but under another probability measure, the Pricing measure, or Risk Neutral measure, or Equivalent Martingale Measure if you want to go technical...

Good stuff although I doubt it will be coming to a stage near you soon.

"In his first public statement since MF's bankruptcy, the eighth largest in U.S. history, Corzine apologized to all those affected and said he was stunned when he heard about the missing money. Corzine, a former head of Goldman Sachs, made the remarks in prepared testimony for a House Agriculture Committee hearing.

"I was stunned when I was told ... that MF Global could not account for many hundreds of millions of dollars of client money. I remain deeply concerned about the impact that the unreconciled and frozen funds have had on MF Global’s customers and others," Corzine said.

"I simply do not know where the money is, or why the accounts have not been reconciled to date," he said.

Wednesday, December 07, 2011

This should be entitled the "End of the Great Divergence" but oh well. I thought I had shared this before, but I do not see it on the blog and even if I had, oh well. It is that important. I used it in class this semester and it actually was the basis of an essay question. It is not strictly finance, but it is more finance than anyone probably wants to admit. Watch it. Yes it is 20 minutes. But I bet you remember it 10 years from now more than anything else you will do today.

Over the past few centuries, Western cultures have been very good at creating general prosperity for themselves. Historian Niall Ferguson asks: Why the West, and less so the rest? He suggests half a dozen big ideas from Western culture -- call them the 6 killer apps -- that promote wealth, stability and innovation. And in this new century, he says, these apps are all shareable.

Remember the 60 Minutes piece about Congressional Insider trading? Well now that everyone knows about it, it appears the Stock Act (blocking insider trading by congress) may be passed. Will it be enforced? Will the SEC be afraid to enforce it? Time will tell.

The article goes on to describe "disagreeable" not as downright mean or evil but in a way I would describe as more "self interested" than others.

From the article:

"...these disagreeable people do consistently exhibit one special trait: They are willing to “aggressively advocate for their position during conflicts.” While more agreeable people are quick to compromise for the good of the group...their disagreeable colleagues insist on holding firm"

So what? Well like the cliche a squeaky wheal gets oiled, these disagreeable people get paid:

"The researchers summarize their data: Overall, across the first three studies, men who are one standard deviation below the mean on agreeableness earn an average of 18.31 percent ($9,772) more than men one standard deviation above the mean on agreeableness. Meanwhile, the “disagreeableness premium” for women was only 5.47 percent ($1,828). Thus, the income premium for disagreeableness is more than three times stronger for men than for women."

BTW the article also confirms previous studies that show women are paid less for same jobs as men.

Friday, December 02, 2011

"Just one in four managers beat the major stock indexes this year, as an intensely volatile market environment drove an aversion from risk that left many dangerously exposed during pullbacks and woefully flatfooted during rallies."

and later:

"Just one in four managers beat the major stock indexes this year, as an intensely volatile market environment drove an aversion from risk that left many dangerously exposed during pullbacks and woefully flatfooted during rallies"

I'd like to see some control for risk in this, but none-the-less, the idea that it is exceedingly hard to consistently beat the market is worth repeating.